Is This Profit Trend Your Friend?

Margins matter. The more Carpenter Technology (NYSE: CRS  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Carpenter Technology's competitive position could be.

Here's the current margin snapshot for Carpenter Technology and some of its sector and industry peers and direct competitors.

Company	TTM Gross Margin	TTM Operating Margin	TTM Net Margin
Carpenter Technology	12.1%	1.0%	0.2%
Universal Stainless & Alloy Products (Nasdaq: USAP  )	15.9%	8.1%	5.0%
Reliance Steel & Aluminum (NYSE: RS  )	27.8%	7.0%	4.3%
Steel Dynamics (Nasdaq: STLD  )	15.5%	10.1%	3.8%
Allegheny Technologies	15.2%	5.9%	2.7%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Carpenter Technology has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Carpenter Technology over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= . TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

• Over the past five years, gross margin peaked at 27.9% and averaged 20.4%. Operating margin peaked at 20% and averaged 12%. Net margin peaked at 14.5% and averaged 8.9%.
• TTM gross margin is 12.1%, 830 basis points worse than the five-year average. TTM operating margin is 1%, 1,100 basis points worse than the five-year average. TTM net margin is 0.2%, 870 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, Carpenter Technology has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at Carpenter Technology? Let us know in the comments below.